Wednesday 30 November 2011 08.47 EST
First published on Wednesday 30 November 2011 08.47 EST

Central banks from around the world have announced emergency measures to boost liquidity in the global economy and prevent the financial system from freezing up.

In a clear sign that policymakers fear the downturn in the eurozone risks spiralling into a fresh credit crunch – where banks stop lending to each other – they announced "co-ordinated central bank action to address pressures in global money markets".

The Bank of England joined the Federal Reserve, the Bank of Japan, the ECB, the Bank of Canada and the Swiss National Bank in taking the measures. Stock markets around the world surged after the central banks said they would cut the price of emergency dollar loans to cash-strapped banks by 0.5 percentage points, and extend the scheme until February 2013.

They will also establish "temporary bilateral liquidity swap arrangements" between one central bank and another, allowing liquidity to be provided at short notice in any currency "should market conditions so warrant".

Analysts said the move would help to unjam the financial markets.

Jeremy Cook, chief economist at foreign exchange company World First, suggested that central bankers had tired of European leaders' failure to fix the euro crisis.

"Cutting swap costs is the equivalent of interest rate cuts," Cook explained. "This may have been a signal that the money markets were a short shove away from complete collapse."

"Clearly the world's central bankers have had enough of all the political mud-slinging and intransigence and they've decided to take the situation by the scruff of the neck."

The FTSE 100 index rocketed by 198 points to hit 5535, a gain of 3.7%, while the Dow Jones industrial average surged by 429 points to 11986.

Easing strains

The central bankers fear that if financial institutions rein in credit, it will hit ordinary consumers and businesses, and threaten a double-dip recession in the world economy.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," they said in a joint statement.

Separately, the ECB, which has come under intense pressure in recent weeks over its role in the deteriorating eurozone crisis, said it would now be able to provide liquidity to struggling banks in yen, sterling, Swiss francs and Canadian dollars if necessary.

Central banks have become increasingly nervous in recent days as declining confidence in the health of the euro, and of many major banks in the single currency zone, has pushed up the cost of funding for banks whose balance sheets have already been ravaged by the credit crunch and the recession.

The minutes of this month's meeting of the Bank of England's monetary policy committee showed that its members believed UK banks could only withstand the increase in funding costs for a relatively short period of time before they would be forced to rein in credit to domestic borrowers.

Separately, the Bank's financial policy committee had warned that emergency measures might be warranted if the situation in the eurozone deteriorated further.